UAE’s potential to become global sukuk leader

When Dubai set an ambitious target in 2013 to become the hub of global Islamic economy little did the industry participants know that the next few years would represent a far different reality characterised by collapse in the crude price. The oil price has plummeted for the las few years, falling from a high of $114 a barrel in 2014 to the current levels of $50. But, the low oil prices did not hamper the confidence of participants who gathered at the third edition of Global Islamic Economic Summit in Dubai earlier this month to review the progress the emirate and the UAE has made towards its vision of becoming the global capital of an industry with total assets estimated at $2.1 trillion.

The UAE has gone from strength to strength in the past few years and has made great strides in the growth of Islamic finance industry and is currently ranked number two in the Global Islamic Economy Indicator (GIEI), which gauges the health and development of the Islamic economy ecosystem. Underpinning the appeal of Islamic finance industry in Islamic and non-Islamic countries is the sukuk market and its attractiveness as an alternative source of funding both for corporations and governments. There is much cause for optimism for Dubai, which has overtaken matured financial markets, including Malaysia, to become the world’s leading centre for international sukuk listings, with Nasdaq Dubai emerging as the world’s largest single exchange at $33.96 billion, according to data compiled by the financial exchange.

However, as with any sector in the region, the Islamic finance sector has been challenged by sluggish economic conditions, and also the lack of awareness and low penetration level of Islamic banking. At a time when regional economies are seeking accessible source of financing to reduce fiscal deficits, several market participants became bullish on sukuk market and predicted a spike in sovereign issuances.

On the contrary, the global sukuk market saw a decline in issuances by 12.5%, and in GCC the issuances dropped by 15% in the first half of 2016 as compared to the same period in 2015, according to a recent report published by Standard & Poors’ Global Ratings. On their part, the GCC governments shied away from tapping the sukuk market but relied largely on conventional debt which saw an increase of nearly 150% in the first half of the year. The S&P report suggests that the trend is not expected to reverse in the near-to-medium term.

This has not gone unnoticed by industry participants at the global Islamic finance event in Dubai where the stakeholders deliberated reasons for the drop off in sukuk issuance. One thing apparent from the trend is the lack of standardisation in Islamic finance which makes sukuk issuance a complex task, making conventional bond market more attractive for corporations and governments. Although some progress has been made in this regard, specifically the UAE Cabinet’s decision to establish a centralised Sharia authority, there exists significant opportunities for the sector before realising its full potential. The policy, announced in May 2016, is widely expected to benefit the Islamic finance sector, particularly sukuk market, in terms of innovation, simplified product structures, and international-standard regulations, among others.

The good news is that there have been serious efforts from all stakeholders, including the Islamic Development Bank (ISB), the Islamic Financial Services Board (IFSB), and the Account and Auditing Organisation for the Islamic Financial Institutions (AAOIFI) to enhance the ingredients of standardisation in an attempt to develop a vibrant and sound Islamic finance sector. Collectively, these will contribute to the popularity and acceptance of sukuk issuance, which in turn will stabilise industry.

At a time when Islamic finance continues to gain additional footholds both within and outside of the Islamic world, it is White & Case’ position that the UAE and the wider GCC will make a global mark in sukuk market fostered by sovereign issuances, but the industry players — including but not limited to banks, corporates, arrangers, law firms, other advisers and investors — should join hands to strengthen the position of sukuk market. It is only then that Sukuk will be considered a critical ingredient for economic development especially in the UAE which is set to become a key player that will shape the future of the sukuk market globally.

Debashis Dey is a Partner of White & Case in their Dubai office.